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Tuesday, October 20, 2009

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Next year federal Equalization payments to the provinces are expected to decline anywhere from 10 to 15 per cent. As a result, some premiers are demanding the program get a giant bailout. The Harper government should reject these expensive demands.

Specifically, some premiers are seeking a guaranteed floor on equalization payments at their current levels. Doing so would commit the federal treasury – the taxpayer – to spending a minimum of $14.8 billion each year on Equalization, regardless of how provincial economies perform.

Given that payments are projected to fall between 10 and 15 per cent, an Equalization bail out would require the Harper government to top up the program between $1.5 and $2.2 billion a year. This money, unbudgeted, of course, would have to be funded through assuming more debt, taking $2 billion a year from other programs or raising taxes. None of these is a wise choice.

Of course, rejecting these demands will be politically difficult for the Quebec-seat-starved Conservative government, given that over 56 per cent of all Equalization money goes to Quebec.

Equalization payments are projected to decline because payments are based on a complicated formula driven in part by the provincial government revenues of strong provincial economies. So, when the economies of former powerhouses like Alberta and Ontario falter, so too do Equalization payments.

The bottom line is that the federal government is already running a deficit projected to be $56 billion this year and $34 billion next year. In five years over $170 billion more will be added to the federal debt. Over the next four years, an Equalization bailout would add another $8 billion to this figure. The first step on the path to reversing this debt trend is to say 'no' to new requests for funds.

Equalization isn't like most other program. Its costs, payments, are designed to fluctuate based on relative performance of the provinces. When large strong provinces do well economically, payments rise. And rise they have. Payments have grown from a total of $8.6 billion in 2003-04 to today's high of $14.8 billion – a 72 per cent increase in six years. Equally, when large strong provinces don't do well economically, payments should decline.

Despite premiers knowing this fact, recipient provinces have refused to prepare for a decline in payments. As a result they are begging the federal government to bail out the program. Taxpayers should not reward this poor planning by running up more federal debt. This new demand to keep Equalization payments at these all-time high levels may either pit east against west or may cost taxpayers even more.

British Columbia, Alberta and Saskatchewan don't receive Equalization payments. Their premiers either will band together to oppose this program bailout or they will trade their acquiescence to a guaranteed floor on payments for some other expensive sop.

They reasonably could argue that a federal bailout would siphon even more federal general revenues east, especially to Quebec. In essence western taxpayers would further subsidize a $7-a-day daycare program in Quebec, for example. Western premiers will want this stopped or will demand 'their fair share' in exchange.

In turn, Quebec will be demanding that payments be guaranteed not to dip below their current $8.4 billion, which has grown from $4.1 billion in 2003-04.

With the Harper government craving more seats in Quebec saying 'no' to this demand will be difficult. However, no one every said that leadership, or the road to economic recovery would be easy. For the sake of taxpayers, the first step is saying 'no' to an Equalization bailout.

'Let's Talk Taxes' is a free commentary provided every two weeks to media outlets and opinion leaders by the Canadian Taxpayers Federation (CTF). The CTF is Canada's leading non-partisan citizens' advocacy group fighting for lower taxes, less waste and accountable government. Founded in 1990, the CTF has 68,000 supporters and 7 offices across Canada. The CTF is funded by free-will, non tax-receiptable contributions.

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